Ehler Fisher Transform indicator is designed to clearly spot major price reversals and visualize them. It is also a leading / lagging indicator of all the indicators present in Zerodha Kite. This is reflected spots where the rate of change is the biggest. It is an indicator built on an oscillator that was developed by John Ehler, the author of the book MESA and Trading Market Cycles: Forecasting and Trading Strategies from the Creator of MESA (Wiley Trading Book 124). Ehler Fisher Transform is based on the assumption that prices do not have a normal probability density function (Gaussian Probability Density Function). A Gaussian PDF is the bell-shaped curve of distribution where 68% of the samples fall within one standard deviation around the mean.
In Zerodha Kite the default value of the indicator is 10. The indicator has two lines – one is Fisher transform line or EF and the other is a signal line or EF Trigger. In this single line, crossovers generate entry signals much like the stochastic oscillator’s fast and slow lines. The best usage of Fisher transform indicator is in combination with other indicators to achieve better performance.
Usage of Ehler Fisher Transform indicator as a lagging indicator:
In the State Bank of India chart above, when the indicator crosses the zero level, a signal appears to change the trend and it indicates buy or sell. Once the indicator crosses the zero from below, open a Long position and once it crosses the zero line from above, open a Shot position. When the opposite signal appears then exit. The other method of entry and exit is when the signal line (EF Trigger) crosses the Ehler Fisher Transform indicator (EF). This also generates buy or sell signals, but these signals are more frequent.
Usage of Ehler Fisher Transform indicator as a leading indicator:
In this indicator, adjust of the top and bottom guides to control the quantity and quality of the trading signals. Ehler Fisher Transform indicator values above +0.5 are considered to be overbought and therefore offer an opportunity to sell. In the values of this below -0.5 are considered oversold and present an opportunity to buy. If the Ehler Fisher Transform indicator peaks above the overbought zone, a sell signal will be generated. If the indicator troughs below the oversold zone, a buy signal will be generated.